IDEAS home Printed from https://ideas.repec.org/p/qed/wpaper/1011.html
   My bibliography  Save this paper

The Marginal Cost Of Public Funds Is The Ratio Of Mean Income To Median Income

Author

Listed:
  • Dan Usher

    (Department of Economics, Queen's University)

Abstract

The marginal cost of public funds is the equilibrium price at the intersection of the appropriately-defined demand curve for and the supply curve of public expenditure. In a world with identical people and with no excess burden of taxation, that price would have to be 1. Otherwise the median voter's choice of a demogrant - or of its opposite, a head tax - fixes the marginal cost of public funds at the ratio of the mean income to the median income. A proof of this assertion is presented not for its realism, but because it calls attention to the interaction of the different influences upon the marginal cost of public funds.

Suggested Citation

  • Dan Usher, 2002. "The Marginal Cost Of Public Funds Is The Ratio Of Mean Income To Median Income," Working Paper 1011, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1011
    as

    Download full text from publisher

    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1011.pdf
    File Function: First version 2002
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Harry F. Campbell, 1975. "Deadweight Loss and Commodity Taxation in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 8(3), pages 441-447, August.
    2. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Western Economic Association International, vol. 22(2), pages 227-243, April.
    3. Austan Goolsbee, 2000. "What Happens When You Tax the Rich? Evidence from Executive Compensation," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 352-378, April.
    4. Frank A. Cowell, 1990. "Cheating the Government: The Economics of Evasion," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532484, December.
    5. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 283-298, April.
    6. Leach,John, 2004. "A Course in Public Economics," Cambridge Books, Cambridge University Press, number 9780521535670.
    7. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December.
    8. Wilson, John Douglas, 1991. "Optimal Public Good Provision with Limited Lump-Sum Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 153-166, March.
    9. Browning, Edgar K. & Liu, Liqun, 1998. "The Optimal Supply of Public Goods and the Distortionary Cost of Taxation: Comment," National Tax Journal, National Tax Association, vol. 51(n. 1), pages 103-16, March.
    10. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
    11. A. B. Atkinson & N. H. Stern, 1974. "Pigou, Taxation and Public Goods," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(1), pages 119-128.
    12. Dan Usher, 2006. "Should The Samuelson Rule Be Modified To Account For The Marginal Cost Of Public Funds?," Working Paper 1065, Economics Department, Queen's University.
    13. Usher, Dan, 1986. "Tax Evasion and the Marginal Cost of Public Funds," Economic Inquiry, Western Economic Association International, vol. 24(4), pages 563-586, October.
    14. Clemens Fuest & Bernd Huber, 2001. "Tax Competition and Tax Coordination in a Median Voter Model," Public Choice, Springer, vol. 107(1), pages 97-113, April.
    15. Ng, Yew-Kwang, 2000. "The Optimal Size of Public Spending and the Distortionary Cost of Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(2), pages 253-272, June.
    16. Hylland, Aanund & Zeckhauser, Richard, 1979. " Distributional Objectives Should Affect Taxes but not Program Choice or Design," Scandinavian Journal of Economics, Wiley Blackwell, vol. 81(2), pages 264-284.
    17. Browning, Edgar K. & Liu, Liqun, 1998. "The Optimal Supply of Public Goods and the Distortionary Cost of Taxation: Comment," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(1), pages 103-116, March.
    18. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
    19. Harry F. Campbell, 1975. "A Benefit/Cost Rule for Evaluating Public Projects in Canada," Canadian Public Policy, University of Toronto Press, vol. 1(2), pages 171-175, Spring.
    20. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-927, October.
    21. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
    22. Leach,John, 2004. "A Course in Public Economics," Cambridge Books, Cambridge University Press, number 9780521828772.
    23. Dahlby, Bev, 1998. "Progressive taxation and the social marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 67(1), pages 105-122, January.
    24. Stuart, Charles E, 1984. "Welfare Costs per Dollar of Additional Tax Revenue in the United States," American Economic Review, American Economic Association, vol. 74(3), pages 352-362, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. K. W Kevin Hsu & C. C. Yang, 2008. "Political Economy And The Social Marginal Cost Of Public Funds: The Case Of The Meltzer‐Richard Economy," Economic Inquiry, Western Economic Association International, vol. 46(3), pages 401-410, July.
    2. Jan Hanousek & Filip Palda, 2009. "Is there a displacement deadweight loss from tax evasion? Estimates using firm surveys from the Czech Republic," Economic Change and Restructuring, Springer, vol. 42(3), pages 139-158, August.
    3. Yeti Nisha Madhoo & Shyam Nath, 2014. "Beneficiary charges: The Cinderella of subnational finance," Chapters, in: Richard M. Bird & Jorge Martinez-Vazquez (ed.), Taxation and Development: The Weakest Link?, chapter 11, pages 364-402, Edward Elgar Publishing.
    4. Dan Usher, 2014. "How High Might The Revenue-maximizing Tax Rate Be?," Working Paper 1334, Economics Department, Queen's University.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Liqun Liu, 2006. "Combining Distributional Weights and the Marginal Cost of Funds," Public Finance Review, , vol. 34(1), pages 60-79, January.
    2. José Manuel González-Páramo, "undated". "Midiendo El Coste Marginal En Bienestar De Una Reforma Impositiva," Working Papers 32-02 Classification-JEL , Instituto de Estudios Fiscales.
    3. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2004. "A Generalized Approach to Multigeneration Project Evaluation," Southern Economic Journal, John Wiley & Sons, vol. 71(2), pages 377-396, October.
    4. Will Martin & James E. Anderson, 2005. "Costs of Taxation and the Benefits of Public Goods: The Role of Income Effects," Boston College Working Papers in Economics 617, Boston College Department of Economics.
    5. Bas Jacobs, 2018. "The marginal cost of public funds is one at the optimal tax system," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 883-912, August.
    6. Liqun Liu, 2004. "The Marginal Cost of Funds and the Shadow Prices of Public Sector Inputs and Outputs," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 17-29, January.
    7. Bjart Holtsmark, 2019. "Is the marginal cost of public funds equal to one?," Discussion Papers 893, Statistics Norway, Research Department.
    8. Mickaël Beaud & Thierry Blayac & Patrice Bougette & Soufiane Khoudmi & Philippe Mahenc & Stéphane Mussard, 2013. "Estimation du coût d'opportunité des fonds publics pour l'économie française," Working Papers halshs-01077141, HAL.
    9. Wendner, Ronald & Goulder, Lawrence H., 2008. "Status effects, public goods provision, and excess burden," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 1968-1985, October.
    10. Ming Chung Chang & Shufen Wu, 2011. "Should Marginal Cost of Public Funds include the Revenue Effect?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 147(I), pages 1-16, March.
    11. James E. Anderson & Will Martin, 2011. "Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(2), pages 289-309, April.
    12. Ming Chung Chang & Hsiao-Ping Peng & Yan-Ching Ho, 2016. "The Social Marginal Cost Curve and a Corner Solution of the Second-Best Level of Public Good Provision: A Review and an Extension," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 152(3), pages 209-241, July.
    13. Atsushi Tsuneki, 2002. "Shadow-Pricing Interpretation of the Pigovian Rule for the Optimal Provision of Public Goods: A Note," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(1), pages 93-104, January.
    14. Slemrod, Joel & Yitzhaki, Shlomo, 2001. "Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(2), pages 189-202, June.
    15. Agnar Sandmo, 2001. "Bridging the Tax-Expenditure Gap: Green Taxes and the Marginal Cost of Funds," CESifo Working Paper Series 579, CESifo.
    16. Bas Jacobs, 2010. "The Marginal Cost of Public Funds is One," CESifo Working Paper Series 3250, CESifo.
    17. Jacobs, Bas & de Mooij, Ruud A., 2015. "Pigou meets Mirrlees: On the irrelevance of tax distortions for the second-best Pigouvian tax," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 90-108.
    18. Ian Parry, 2002. "Tax Deductions and the Marginal Welfare Cost of Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(5), pages 531-552, September.
    19. Åsmund Sunde Valseth & Katinka Holtsmark & Bjart Holtsmark, 2019. "The costs of taxation in the presence of inequality," Discussion Papers 908, Statistics Norway, Research Department.
    20. Olof Johansson-Stenman, 2005. "Distributional Weights in Cost-Benefit Analysis—Should We Forget about Them?," Land Economics, University of Wisconsin Press, vol. 81(3).

    More about this item

    Keywords

    Marginal Cost of Public Funds;

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:1011. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mark Babcock (email available below). General contact details of provider: https://edirc.repec.org/data/qedquca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.